Schenectady County

Court affirms Schenectady’s win in landmark assessment case

The city has withstood an appeal of its win in a groundbreaking case that could raise the assessment
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The city has withstood an appeal of its win in a groundbreaking case that could raise the assessments of every drug store in the Capital Region.

The Appellate Division of state Supreme Court upheld today a ruling that the city can use a different valuation method that could double the assessment of the CVS pharmacy at 1204 Eastern Ave.

The decision means that when the city reassesses CVS next year, it could hike the property’s value from $2.02 million to $4 million.

But the court’s sweeping decision also affects most drug stores in the state, paving the way for massive assessment increases. The court ruled that municipalities can now assess drug store properties based on income the landlord receives for renting to those companies.

At issue is the fact that most chain drug stores do not own their property. Instead, pharmacies agree to an unusual lease arrangement in which they promise to pay rent each month for decades, no matter what happens to their store. They also agree to pay all taxes and maintenance.

The leases are incredibly valuable, since the landlord never stands to lose rent if a business shuts down. When one of the so-called “triple-net leases” is placed on the market, they are routinely purchased for millions of dollars.

CVS and many other pharmacies in the region have appealed their tax assessments on the argument that the leases should not be considered in the total value of the property. In the Schenectady case, CVS owner Brooks Pharmacy said the city should only look at traditional property values: the value of the land and the building.

The Eastern Avenue CVS building cost $2.4 million to build in 2000, so Brooks Pharmacy argued that its current assessment should be $1.34 million, not $2.02 million.

City officials, however, noted that the owner of the land clearly felt it was worth far more than $2 million. Shortly after CVS signed a triple-net lease in which it promised to pay $27,000 a month and all taxes and maintenance until 2023, the landlord sold the land and the lease to another owner for $3.6 million. Less than a year later, the land and lease were sold again, this time for $4.1 million.

City officials said those sales should be considered when determining the true value of the property.

“There is a market for these lease arrangements,” Corporation Counsel L. John Van Norden said. “We argued you cannot separate the lease — the income stream — from the land.”

The courts agreed, with the city winning at the state Supreme Court in January 2007 and then winning again today after CVS appealed to the Appellate Division.

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